Deficit of Financial ABCs

Deficit of Financial ABCs

When the paper mill he’d worked at most of his adult life shut down two years ago, welder Rémi Gravel decided to strike out on his own. Buoyed by advice from an accountant cousin, a $180,000 line of credit he got by mortgaging his home, and promises of contracts from friends in the residential and commercial construction industries, he set up shop in a Quebec City industrial park and started churning out ramps, stairs, beams and other forged metal products.

“So far, so good,” says Mr. Gravel, who now has four full-time employees and is generating several hundred thousands of dollars in annual sales.

One downside he finds to being in business, however, is the need to deal with financial management realities and challenges such as tax filing, payrolls and inventory.

“I think I understand them but I’m not comfortable with them at all,” says Mr. Gravel, who compares basic financial and accounting lingo to a foreign language.“I’d like to learn more about them but I don’t have time for that,” he adds. “I rely 100% on my accountant to take care of all that stuff.”

Results from a new national survey and quiz on the financial literacy of Canadian small business owners suggest Mr. Gravel is not alone — not by a long shot.

Conducted in late November by Angus Reid on behalf of Intuit Canada, makers of Quicken, QuickBooks and other leading business, financial and tax management solutions, services and products, the 10-question quiz tested 501 respondents on their knowledge of financial fundamentals.

Questions included ‘What is the role of the balance sheet?’ and ‘How can short-term cash-flow be improved?.’

Thirty-nine percent of respondents, however, scored ‘basic’ (five to six correct answers), while a whopping 44% scored ‘below basic’ (none to four). In other words, 83% of respondents scored 60% or less.

For Jeff Cates, Intuit Canada’s managing director, the results indicate a serious deficiency in the financial literacy skills of Canada’s 2.4 million small-business owners, an entrepreneurial class that is responsible for almost half of the country’s private sector jobs.

“Starting a small business is incredibly empowering because it’s about having an idea, seizing the potential and using an uncompromising drive to get the job done,” Mr. Cates says.

But this “entrepreneurial journey,” he adds, is marked with many pitfalls and perils. Mr. Cates pointed to recent numbers from Statistics Canada that show that while 85% of small businesses survive their first year, only 51% are still alive after five years.

In addition to starting a business on sound financial footing, Mr. Cates calls the ability to understand and manage everyday financial realities and challenges “the key to long-term success [and] essential to reversing this trend.”

He noted that the Intuit survey found only about one in 10 small business owners reach out for help when they are getting started.

When asked about their understanding of the financial fundamentals of running a business when starting out, 51% of respondents claimed to have had “a good understanding of how to manage their finances,” while nearly a third (31%) admitted they “had a lot to learn.” Only 11% sought professional help, as Mr. Gravel did.

“These are some very sobering numbers,” says Dan Kelly, president and CEO of the 109,000-member Canadian Federation of Independent Business, the largest business group on Earth. “But I’m not surprised.”

According to Mr. Kelly, the vast majority of small business owners in Canada don’t have formal training in financial matters. “A guy opens a welding shop because he knows how to weld,” he says. “He doesn’t know — and doesn’t really need to know — what accruals means.”

He adds that while many budding entrepreneurs may not know the correct terminology, they often have an organic sense or understanding for things such as cash flows and balances.

“They may not talk like bankers but they know what’s what,” Mr. Kelly says. “But we can’t ignore the very stark reality that most small businesses fail. And, like the survey shows, financial literacy is a problem that needs to be addressed.”

For Mr. Cates, the good news in the survey results is that half of respondents said they recognize that financial management is indeed an important business task they should spend time on.

The same 50% also identified several activities they said would help to increase their knowledge of financial fundamentals — and help close the literary deficiency gap in the process.

Chief among them was spending more time with an accountant. Other activities included seeking information and advice from other small-business owners, and taking online tutorials that focus on financial management.

For Mr. Cates, another encouraging finding was that small-business owners who identify as having an advanced understanding of financial management are five times more likely to use software or solutions provided by accountants than outdated manual methods.

Those owners are also many times more likely to express an advanced knowledge of accounting principles than those who continue to rely on pens and paper.

“The results validated what we were hearing before: that small-business owners need and are looking for help and knowledge to give them more stable financial footing, deeper insight into their financial performance [and] save them time and money so they can grow and thrive,” Mr. Cates says.

In addition to publicly endorsing federal initiatives aimed at raising awareness about the issue of financial literacy, including Financial Literacy Month (November) and pending legislation to create the Financial Literacy Leader, Mr. Cates says Intuit Canada is both working with and reaching out to several associations that deal with small businesses in an effort to market their wide range of financial products and services.

Intuit is also looking at further developing its online teaching network for accountants learning its products. That core company activity is already the largest of its kind in Canada.

“I’m confident that, working together, we can help boost financial literacy and make more small business success possible,” Mr. Cates says.

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